Client relationships are the most critical asset possessed by any insurance agency, and when an agency finds itself competing for those relationships against its own former employee, relations can become especially ugly. Ask a spurned employer about the impact of the loss of one of its top producers, and the conversation might sound like a hard-luck love song full of loss, anger and regret. Given what's at stake, this is completely understandable—yet it is highly preventable.
The loss of key employees or independent producers, whether through voluntary departure or termination, is a fact of life for all types of professional service firms. Insurance agencies and brokerages have been turning to non-competition, non-disclosure and non-solicitation agreements to help them protect their books of business and stanch the bleeding when a departure occurs.
Brokerage and agency leaders have said holding onto their critical client and employment relationships is the top issue keeping them up at 4 a.m. This is in part because of uncertainty created by the inconsistent treatment of these contracts under various states' laws.
Taking a proactive approach involves weaving carefully crafted language into the employment agreement at the time of hiring, following a number of sensible best practices and understanding how a non-compete agreement may eventually play out in a court dispute. And for employers bringing in a new employee from a rival firm, understanding the non-competition parameters imposed by the new employee's previous employer is critical to avoiding a lawsuit.
Get It in Writing
A great deal of time and effort is required to build the trust and confidence that helps a client differentiate one agency or brokerage from the rest—which makes it well worth taking steps to prevent those relationships from vanishing when a client's point of contact leaves. Without a written agreement signed by the employee that safeguards the firm's accounts from poaching, it is difficult for the agency to succeed in a legal action to prevent poaching or to recover losses when it occurs.
A proactive approach begins with implementing a policy that requires all employees, especially producers and others in client-facing positions, to sign documentation outlining what they cannot do, and for how long they cannot do it if they decide to leave. The three types of agreements are non-competition, non-disclosure and non-solicitation agreements:
- Non-compete agreements (NCAs), when enforceable, afford the most comprehensive protection against post-employment competition. A broad NCA precludes an employee from selling insurance in any capacity for X years following departure. Others may be more specific and preclude the sale of insurance within a certain geographic range, industry or other targeted niche for the determined time. This depends upon the situation. For example, when an agency's range is national, a geographic limitation may be moot. Typically, NCAs are drafted with a 2-year limit. A limit of 3 or more years will likely be found excessive by a court, and a shorter limit may invite disregard. When the NCA grows out of the sale of an agency, however, a restriction of as long as 5 years on competition by the seller is not uncommon. If an NCA is overly broad and doesn't include reasonable parameters, courts will be less inclined to enforce it. There must be a reasonably equitable balance between the agency's legitimate interest in protecting its business and the ex-employee's ability to earn a living.
- Non-disclosure agreements (NDAs) prohibit the employee from disclosing or using the company's confidential or proprietary information. NDAs aren't necessarily what protect the company from theft of trade secrets (other areas of the law cover that), but they do spotlight the fact that the employer is serious about protecting confidential information and provide an opportunity to clearly define what the employer considers confidential or proprietary. This may include sensitive pricing information, renewal dates, client contacts, business strategies and customized client service processes. Because today's rogue employee can siphon a trove of information in just a few keystrokes, the most enlightened firms are deliberate about information security.
- Non-solicitation agreements (NSAs) prohibit the employee from soliciting clients of the agency for a limited time following their departure. NSAs may be broad to include any client the employee has serviced or prospected while at the firm, or they may be sharply focused on certain key clients that the company especially wishes to protect. They also may prohibit the employee from working for a rival agency that is soliciting those clients, regardless of whether the former employee is involved in the solicitation. A growing number of NSAs recognize the value of retaining other key employees and producers—the loss of whom may be even more devastating than the accounts they service—by prohibiting a departed employee from actively recruiting others to his or her new shop.
Enforceability and Litigation
No federal statutes govern the protection of the critical relationships that make or break an agency, similar to insurance regulation, this legal framework varies by state, and some states have more highly developed case law than others. Before entering into any client-relationship-protecting agreement with a new employee, understand the relevant limitations and opportunities that may exist based on how courts have ruled regarding the enforceability of contracts or certain provisions.
The variability of states' enforcement of post-employment restrictive covenants was recently on display in the widely publicized litigation involving Aon Corp. and Alliant Insurance Services. That case began when several senior employees of Aon Risk Solutions' construction services group, including its CEO, surprised Aon by resigning and joining upstart competitor Alliant in June 2011. The lawsuits that followed centered around the enforceability of the restrictive covenants that Aon had in place with these former employees, whose employment agreements prohibited competition for business serviced while at Aon for a 2-year period, without geographic limits.
According to published reports, Aon's construction services group lost 60 employees to Alliant, with more than 100 broker of record letters transferring more than $20 million in revenue from Aon to Alliant. Clearly, the stakes couldn't have been much higher for either company.
Aon scored an impressive victory late last year when a trial court in New York City, applying Illinois law, found that Aon CSG's former CEO and others had violated their restrictive covenants when they left Aon for Alliant. The court ordered a wide-ranging preliminary injunction upholding the restrictions in Aon's favor.
Having made the key determination that the law of California governed the dispute—and not that of Aon's home state Illinois—the court found Aon's restrictive covenants to be void and unenforceable, notwithstanding Aon's argument that the three had acted with unclean hands by coordinating a mass exodus from Aon and were using Aon's confidential information. These ex-employees of Aon were thus unencumbered by their NSAs. At press time, it remains unclear as to the final outcome of this litigation.
Poaching, it would appear, is a matter of perspective. The same NSA that shackles an ex-employee from competing in New York or Illinois may pose no obstacle whatsoever to one's "mobility and betterment" in California. Despite the fact that the agreements in place between Aon and its former executives reportedly included a choice of law clause (Illinois), this multi-venue litigation has proven to be inherently unpredictable to its core given the authority of the courts to set aside a private agreement as to which state's law governs. Seen in this light, careful consideration of a choice of law clause—whether to have one, and if so, which state's law to stipulate—should be considered a best practice.
The Aon case illustrates the complexity and uncertainty of restrictive covenant litigation. A typical first step toward legal redress is to seek a preliminary injunction against the former employee within days of the separation. But courts typically will not grant such an injunction without a strong showing that the agency is likely to prevail on its claim. This requires a massive (read: expensive) effort to investigate the facts and to launch a legal offensive on extremely short notice. Without smoking-gun-quality evidence of improper activity, the request will probably fall flat, even if the restrictive covenant is academically enforceable. And enforceability is hardly a given, as the restrictive covenant must be found to be reasonable in purpose, in duration, and in geographic scope, and also must be supported by adequate consideration.
More to the point, if a claim does succeed at the injunction stage, the eventual cost of litigation in fees, lost time and strained client relations may outweigh the positive impact of the victory. Bear in mind that legal fees do not shift to the loser (unless the agreement provides for that), which means that even if you win, you lose in a protracted legal battle. For this reason, post-employment restrictive covenant cases often burn a short fuse before detonating and releasing a new status quo—the product of a preliminary legal ruling followed by pragmatic (if acrimonious) negotiation.
Most sources conceded that employee departures involving competitive risk are best viewed through a transactional lens. There is a price to be paid for the freedom to compete, and the sooner the two sides come to see it that way and sit down to work it out, the better for the parties and their clients.
Best Practices and Other Considerations
Agencies too often refuse to accept the risk of losing a key employee ("Why would anyone want to leave here?") or look at any eventual departure with a sentimental, punitive mindset, especially when strong egos are involved. But the best is to treat the employment relationship like a transaction, where each party clearly understands their expectations should the relationship end and takes appropriate precautions to avoid future disputes. Review all documents with legal counsel experienced in employment agreements and ideally in the insurance industry—many agencies have learned the hard way that litigated endings are rarely happy ones.
Be upfront, fair and reasonable. Ideally, NCAs, NDAs and NSAs should be signed upon hire as a condition of employment. Sometimes later developments necessitate signing new contracts, such as when a vulnerability is discovered or when one agency acquires another. In these cases, this should be handled as soon as possible, and they should accompany some sort of promotion, raise or favorable change. States vary on this issue, but the bottom line is an NCA can't be sprung upon an employee in a punitive way. Dialogue is important; as with interpersonal relationships, getting everything on the table right away is best.
Agencies and brokerages increasingly use independent contractors, but the informal feel of that relationship should not distract the agency from using proper agreements to clearly define clients and information that are the agency's property.
Data security is another critical issue that should be dealt with up front. Today, it is far too easy for a departing employee to sneak off with client contact information or policy renewal schedules. Employers should take reasonable steps through their acceptable use or other information technology policies to legally define what is confidential—and to show that it strongly protects that information by limiting access.
Finally, agencies hiring a lateral need to be just as conscious of the incoming employee's non-compete restrictions as the previous employer. Determine whether a potential new hire is bound by any such agreements, and if so, review the agreements carefully with counsel to determine what he or she will be able to do (or not do) for the next few years. Get it in writing that the agency does not allow a current employee to take actions that would violate any existing non-compete agreements.
The challenge for agencies is to provide their agents with the training and business development resources to make them successful contributors without becoming an incubator for competitors. Don't wait until it's too late; being proactive and sensible about the potential for any employee's departure goes a long way toward preventing future disputes and unnecessary drama. Some ill feelings may still accompany a chance meeting on the street with a former employee or partner—but these feelings beat a court battle over key clients and commissions.
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